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INVESTING THE CANADIAN WAY

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Dividend Stocks

Possibly the Best List to Start Investing from is the Canadian Dividend Aristocrats 2021

This Canadian Dividend Aristocrats guide will not only provide you with a list of stocks, but it will come with a methodology to select the right companies for your portfolio. We will also provide you with our favorite aristocrats.

The Canadian dividend aristocrats is the little brother of a much larger and world-known dividend grower list. Dividend growth investors are familiar with the popular U.S. Dividend Aristocrats List. This list of dividend growers with over 25 consecutive years of dividend increases is famous around the world. What about Canadians? Do we have companies showing 25+ years of consecutive dividend increases?

While Canada does have a few companies that achieved that feat, the Canadian dividend aristocrats list would be too short if we would include them based on the US requirement. Canadian Aristocrats are companies that have increased their dividends for 5 consecutive years.

While many investors may think this is not enough to give an elite title to a company, I tend to disagree. I love picking stocks that have just started increasing their dividends and are on their way towards a great future. This is a unique opportunity for investors to select high quality companies and still enjoy stock price appreciation going forward. We all wish we bought shares of Coca-Cola (KO) 50 years ago when it was a young dividend grower. You have a similar opportunity with the Canadian dividend aristocrats.

If you want to skip directly to the good stuff, download our Best Canadian Aristocrats Selection here:

Canadian dividend growers

Which Canadian stocks are included in the Dividend Aristocrats list?

As opposed to the U.S. Aristocrats, Canadian companies don’t have to show 25 years of consecutive dividend increases. In fact, even the 5 years minimum requirement isn’t as strict as we would think. Here’s the short list of requirements Canadian companies must meet to earn the Aristocrat title:

  • The company’s common stock must be listed on the Toronto Stock Exchange and be a constituent of the S&P BMI Canada. Stocks listed on the TSX venture, such as Sylogist (SYZ.V), aren’t eligible.
  • The company’s market capitalization (Float-adjusted) must be at least $300M. We want companies of a minimal size. Yet $300M is quite permissive.
  • The increase in regular cash dividends for 5 consecutive years, but companies could pause their dividend growth policy for a maximum of 2 years within a said 5-year period. In other words; as long as the company intends to share the wealth, it has a good chance of being included among the elite dividend growers.

Canadian aristocrats Vs. U.S. aristocrats

Needless to say, it is easier to become a Canadian aristocrat than a U.S. aristocrat! To become a U.S. aristocrat, companies must:

  • Be a member of the S&P 500
  • Show 25+ consecutive years of dividend increases
  • Meet certain minimum size & liquidity requirements

It would be foolish to think selecting any aristocrats out of the list would make a good investment. On both sides of the border, we regularly see companies getting added or withdrawn for the list. This means the list you see in 2020 is those only who survived the test of time.

This article will not only provide you with a list of promising stocks, but it will also come with a methodology to select the right companies for your portfolio.

What are the Canadian dividend Aristocrat for 2021?

The list below contains 81 Canadian Dividend Aristocrats as of early 2021. They are among the best Canadian dividend stocks. However, this list can be expected to change following the current pandemic situation. Dividends are one of the items companies tend to cut when feeling liquidity pressure.  Some companies have already announced a dividend cut or suspension and will be taken off the list in 2021. We have identified companies that won’t be listed as aristocrats next year with an asterisk.

You will also find very few Technology sector companies on the list as that sector has never been known for their steady cash payments to shareholders. You will, however, find many Financial Services companies along with some Industrials.  Those two sectors have been and continue to be well established dividend payers.

Canadian Dividend Aristocrats per Sector

Companies with an asterisk next to their name will be taken off the official list in 2021 as they have either cut or suspended their dividend during the pandemic.

You can download the complete list with additional metrics such as dividend growth, dividend yield, revenue growth, P/E ratio, etc. by clicking on the following button:

Ticker Name Sector
RY.TO Royal Bank of Canada Financial Services
TD.TO The Toronto-Dominion Bank Financial Services
CNR.TO Canadian National Railway Co Industrials
BNS.TO Bank of Nova Scotia Financial Services
ENB.TO Enbridge Inc Energy
BAM.A.TO Brookfield Asset Management Inc Financial Services
BMO.TO Bank of Montreal Financial Services
TRI.TO Thomson Reuters Corp Industrials
BCE.TO BCE Inc Communication Services
TRP.TO TC Energy Corp Energy
CM.TO Canadian Imperial Bank of Commerce Financial Services
ATD.B.TO Alimentation Couche-Tard Inc Consumer Defensive
MFC.TO Manulife Financial Corp Financial Services
FNV.TO Franco-Nevada Corp Basic Materials
CNQ.TO Canadian Natural Resources Ltd Energy
GWO.TO Great-West Lifeco Inc Financial Services
SLF.TO Sun Life Financial Inc Financial Services
T.TO TELUS Corp Communication Services
FTS.TO Fortis Inc Utilities
NA.TO National Bank of Canada Financial Services
L.TO Loblaw Companies Ltd Consumer Defensive
IFC.TO Intact Financial Corp Financial Services
MG.TO Magna International Inc Consumer Cyclical
POW.TO Power Corporation of Canada Financial Services
PPL.TO Pembina Pipeline Corp Energy
DOL.TO Dollarama Inc Consumer Defensive
WN.TO George Weston Ltd Consumer Defensive
SAP.TO Saputo Inc Consumer Defensive
MRU.TO Metro Inc Consumer Defensive
IMO.TO Imperial Oil Ltd Energy
EMA.TO Emera Inc Utilities
AQN.TO Algonquin Power & Utilities Corp Utilities
OTEX.TO Open Text Corp Technology
CCL.B.TO CCL Industries Inc Consumer Cyclical
CTC.A.TO Canadian Tire Corp Ltd Consumer Cyclical
EMP.A.TO Empire Co Ltd Consumer Defensive
CAR.UN.TO Canadian Apartment Properties Real Estate Investment Trust Real Estate
CU.TO Canadian Utilities Ltd Utilities
QBR.B.TO Quebecor Inc Communication Services
RBA.TO Ritchie Bros Auctioneers Inc Industrials
FSV.TO FirstService Corp Real Estate
TIH.TO Toromont Industries Ltd Industrials
ONEX.TO Onex Corp Financial Services
TFII.TO TFI International Inc Industrials
PKI.TO Parkland Corp Energy
IAG.TO iA Financial Corp Financial Services
RNW.TO TransAlta Renewables Inc Utilities
KEY.TO Keyera Corp Energy
BLX.TO Boralex Inc Utilities
AP.UN.TO Allied Properties Real Estate Investment Trust Real Estate
INE.TO Innergex Renewable Energy Inc Utilities
BYD.TO Boyd Group Services Inc Consumer Cyclical
CCA.TO Cogeco Communications Inc Communication Services
GRT.UN.TO Granite Real Estate Investment Trust Real Estate
FTT.TO Finning International Inc Industrials
CHP.UN.TO Choice Properties Real Estate Investment Trust Real Estate
ACO.X.TO Atco Ltd Utilities
PBH.TO Premium Brands Holdings Corp Consumer Defensive
MIC.TO Genworth MI Canada Inc Financial Services
CPX.TO Capital Power Corp Utilities
STN.TO Stantec Inc Industrials
MFI.TO Maple Leaf Foods Inc Consumer Defensive
ENGH.TO Enghouse Systems Ltd Technology
SRU.UN.TO SmartCentres Real Estate Investment Trust Real Estate
SJ.TO Stella-Jones Inc Basic Materials
OR.TO Osisko Gold Royalties Ltd Basic Materials
CWB.TO Canadian Western Bank Financial Services
CSH.UN.TO Chartwell Retirement Residences Real Estate
SMU.UN.TO Summit Industrial Income REIT Real Estate
IIP.UN.TO InterRent Real Estate Investment Trust Real Estate
TCL.A.TO Transcontinental Inc Industrials
EQB.TO Equitable Group Inc Financial Services
CRT.UN.TO CT Real Estate Investment Trust Real Estate
NWC.TO The North West Co Inc Consumer Defensive
GSY.TO goeasy Ltd Financial Services
ITP.TO Intertape Polymer Group Inc Consumer Cyclical
EIF.TO Exchange Income Corp Industrials
CGO.TO Cogeco Inc Communication Services
ARE.TO Aecon Group Inc Industrials
FSZ.TO Fiera Capital Corp Financial Services
SIS.TO Savaria Corp Industrials

3 Steps to select the right aristocrats for your portfolio

As previously mentioned, going “all-in” with Canadian aristocrats may not make your portfolio any better. After downloading the Canadian dividend aristocrat lists, you can apply the following steps to ensure you pick only the best stocks possible.

#1 Focus on the sector you need

Whenever you isolate certain metrics, you will notice that certain sectors will be generally strong. This is because each sector thrives or faces tailwinds at different times. The timing of your research will determine which sector offers you the best opportunities. Unfortunately, you can’t buy all your stocks from the same sector. The DSR recession-proof workbook will guide you in this regard.

I would rather buy the best of breed for each sector than buy 4 stocks from the same industry. This will help my diversification and smooth my total returns over time. For example, the fact I had many tech stocks in my portfolio protected me to some extent from the March 2020 crash. Tech, utilities and consumer defensive stocks held the fort while my financials, industrials and consumer cyclicals were getting killed. Even more importantly, that diversification helped my portfolio bounce back relatively quickly.

#2 Start with the dividend triangle

If you have been following me for a while, you know that I’m a big fan of what I call the Dividend Triangle. This simple focus on three metrics will reduce your research time and help you target companies with more robust financials. I start all my searches with a look at companies showing strong revenue growth, earnings growth and dividend growth over the past 5 years. The detailed explanation is found in our recession-proof workbook, and I invite you to read and re-read that workbook as necessary.

First, download the Canadian dividend aristocrats list. Then, in a few simple clicks, you will set the filters and you can start hunting for the best stocks for you at that moment in time.

By selecting only companies showing positive numbers in the 5yr Rev growth, 5yr EPS growth and 5yr Div growth columns, you will find those companies with a positive dividend triangle.

This methodology covers all “regular companies”, but not REITs and other businesses that use non-conventional metrics instead of EPS. We will address those types of companies later in this letter.

#3 Priority to dividend growth, not yield

Now that you have narrowed down the number of stocks, it is time to trim that list further. Throughout the years, most of my best stock picks have been found amongst the strongest dividend growers. When you think about it, it totally makes sense. Those companies must earn increasing cash flows and show several growth vectors to be confident enough to offer a 5%+ dividend increase year after year.

Past dividend growth is a result of several good metrics at the same time. This usually means stronger revenue, consistent earnings growth, increasing cash flow and debt that is under control. We’ll dig into the other metrics later, but at first glance, a strong dividend grower will likely come with other robust metrics.

While not all my holdings show such strong dividend growth, I always search for the strongest dividend growers when selecting a new stock for my portfolio.

Using this simple 3 step methodology will narrow down your search to a few stocks per sector. It will make your final selections easier and your portfolio will likely perform better over the long run.

How to Calculate a Fair Value for Canadian Dividend Aristocrats

Valuation does play a major role in the buying process. However, this should not be the single factor that determines whether you buy or not. This is one factor among many. To be honest, I would rather buy an “overvalued stock” with a strong dividend triangle, great growth vectors and lots of potential for the next 10 years than buying an “undervalued stock” that has nothing else but a good yield and a poor valuation.

When I find a company I really like, but the valuation seems ridiculous, I’ll be tempted to put it on a watch list and wait for a while. I usually build this watch list on the side and when I’m done with one of my current holdings (e.g. the company doesn’t meet my investment thesis anymore), I pull out the watch list and check to see if valuations have changed. Once again, I’ll pick any “Alimentation Couche-Tard” (overvalued, strong growth) over any “Suncor” (undervalued, modest growth) of this world.

PE Ratio

At DSR, we use mostly two methodologies to determine a stock’s valuation. The first one is to consider the past 10 years of price-earnings (PE) ratios. This will tell you how the stock is valued by the market over a full economic cycle. You can then determine if the company shares enjoyed a PE expansion (price grows faster than earnings) or if the company follows a similar multiple year after year.

Dividend Discount Model

When you look at stocks offering a yield of over 3% with a stable business model, the dividend discount model (DDM) could be of great use. Keep in mind the DDM gives you the value of a stock based solely on the company’s ability to pay (and grow) dividends. Therefore, you will find strange valuations when you look at fast-growing companies with low yields (e.g. Alimentation Couche-Tard!). Find out more about the DDM model and its limitations here.

While the idea of receiving dividends each month is seducing, this is not what makes dividend growth investing magic. It’s the combination of capital growth and dividend growth (read total return) that truly generates the magic in your portfolio. You can download the complete list with additional metrics such as P/E ratio, dividend growth, dividend yield, revenue growth, etc. by clicking on the following button.

Best Canadian Dividend Aristocrats for 2020

Searching through almost 100 stocks could become tiresome. Using the Dividend Stocks Rock investing methodology, I’ve selected my favorite Canadian Dividend Aristocrats. You can download a complete eBook on our best Canadian Aristocrats here.

Alimentation Couche-Tard (ATD.B.TO)

Alimentation Couche-Tard ATD.B.TO

Business Outlook

Alimentation Couche-Tard operates an extensive network of convenience stores across the world. North America, Ireland, Scandinavia, Poland, Russia and even the Baltics are the homes to their operations. Revenue sources are divided into 3 major categories: merchandise and services, road transportation fuel, and others. In the last 2 decades, management has been focusing on growing the company via acquisitions.  This has been a successful strategy as evidenced by their stock growing from $2.40/share in 2009 to their peak of $46.10 in early 2020.

ATD.B.TO shows an annualized dividend of $0.28/share which equates to a yield of around 0.60%. This is obviously not the juiciest yield around, but the resilience of their business model, especially with the current pandemic, has proved to be a winner. Now in its 12th year of annual dividend increases (split-adjusted), the company has proven that their business is capable of significant growth and value enhancement.

Potential Risks

The management has proven themselves to be quite adept at using acquisitions to grow their business, but inherently that method of growth has a healthy dose of risk associated with it.  Non-organic growth presents its own share of risks when it comes to identifying the right targets, the integration of the companies, and the synergies realization. With fuel consumption forecasts being lowered globally, ATD.B.TO may face some challenges down the road when it comes to demand for their core products.

Canadian National Railway (CNR.TO)

Canadian National Railway CNR.TO

Business Outlook

What would the Canadian economy be without an extensive railroad network?  CNR.TO built a coast to coast railway that delivered over 6M carloads last year over their 19,600 miles of track. Revenues are spread across several segments.  Most notably intermodal containers, petroleum and chemicals, grain and fertilizers, and forest products.  As the Canadian economy expanded and diversified, CNR.TO always has been a key player to move products across the vast territory of the Canadian nation.  The stock price had soared to a high of $127.79 in early 2020, which represents a 224% gain since 2012.

CNR.TO yields slightly under 2% with its annual dividend of $2.30. The fundamentals of this business are strong, and that should present the opportunity for further dividend increases in the future.  Over the last five years the dividend was increased by 16.54%.  Strong dividend growth should continue over the next five years and beyond.

Potential Risks

CNR.TO’s operations are fraught with risks. Railways confront harsh weather, ongoing maintenance costs, and management of both physical and personnel assets.  Management also has the challenge of responding to the organic growth of Canada’s overall economy. Key segments of the Canadian economy like forest products, oil and grains should be closely monitored as rail is often the primary way for those products to be brought to market.

Fortis (FTS.TO)

Fortis FTS.TO

Business Outlook

Fortis operates utility transmission and distribution assets across Canada and the United States. The company has a customer base of around 2.5M, which is split between gas and electricity consumers. The company holds smaller stakes in electricity generation and Caribbean utilities, which helps FTS.TO to generate 66% of its earnings outside of Canada. They also hold 16,000 miles of high-voltage transmission lines that power their distribution network.

FTS.TO shows a yield slightly above 3.50%, which is on the low side compared to its utility peers. Low yield aside, the company has invested massively in its operations, and has proven itself to be a solid bet for future growth. Management has deployed a 5-year investment plan with the goal being growing, sustainable, and quality dividends.

Potential Risks

Utility companies typically show low to mid single digit growth over time.  FTS.TO also recently acquired 2 businesses in the U.S. in pursuit of additional growth.  Taking on operations south of the US/Canadian border may quickly become a money pit as economies of scale may or may not be realized. Development in “foreign” markets should be undertaken with care as they may also face added competition and margin pressure.

Royal Bank of Canada (RY.TO)

Royal Bank RY.TO

Business Outlook

The largest bank in Canada, RY.TO, provides financial services to individuals, commercial and institutional clients. Their commercial banking segment makes up 50% of the bank’s revenue which makes it a powerhouse amongst the Big 5 Canadian banks. Although most of its operations are concentrated in Canada, they also expanded into the US in 2015 by acquiring City National Bank whose focus was on wealth management operations with their high net worth clients.

Canada’s largest bank pays an annual dividend of $4.20/share which translates into a current yield near 4.50%. The company has increased its dividend twice per year for the last couple of years. This additional dividend growth was at least partially funded by their impressive growth in insurance, wealth management and the capital markets sectors.

Potential Risks

Capital markets are often the main risk for a bank where the impact of mistakes can be felt across all the bank’s operations.  RY.TO has an accentuated exposure to the housing market, and a pandemic caused recession where people are struggling to pay their bills might put significant pressure on their margins.

 

Telus (T.TO)

Telus T.TO

Business Outlook

In the communications industry, we have Telus, which enjoys a nearly 30% market share in its industry. Their 9M subscribers are offered television services, landline phones, and internet. The company has configured many homes with fiber on its wireline footprint.  T.TO also presents interesting and growing profits in its wireless segment, which has grown dramatically since 2010.

T.TO pays a quarterly dividend of $0.29125 leading to an annual yield of nearly 5%. The company was able to generate an 8.18% dividend increase over the past 5 years and is well-positioned to make significant strides in profitability with their new 5G network.

Potential Risks

T.TO is one of the Big 3 communications companies in Canada. The only problem with that is that even the Federal Government wants to see more competition in this industry. They could face more competition in the future which could potentially lower their prices on existing products and services and degrade their margins.

 

Open Text Corporation (OTEX.TO)

Open Text (OTEX.TO)

Business Outlook

Open Text has created a specialized business in the technology sector. Managing, integrating, and classifying raw data, as part of an Enterprise Information Management (EIM) system is the core business of OTEX.TO. The company has secured many large customers for their services including Governments, multinational corporations, and various institutions. Since the company’s inception in 1991, management has focused on growth by acquisition, and they have successfully completed a dozen acquisitions to attain their current level of operations.

OTEX.TO started paying dividends in 2013, which is unusual for a technology company that typically focuses on growth. Paying out an annual $0.6984/share dividend yields just under the 5% mark. They are now in their 6th year of increasing dividends, and the company has added the necessary expertise in its operations to sustain payout growth for years to come.

Potential Risks

Remember that OTEX.TO operates in the tech sector, and that means the company faces many of the giants we all know about. It is a fast-paced environment that requires quick responses to opportunities and outstanding operating flexibility. Acquiring companies is a good way to grow your business volume, but it also brings its own share of risks.

Falling Canadian Aristocrats

The pandemic outbreak early in 2020 brought a lot of volatility and uncertainty to both businesses and their employees. With multiple companies closing at least temporarily, many companies tried to make a digital turnaround to cope with the “new reality”, and of course, many other companies simply couldn’t afford to close temporarily or restructure their operations, and they simply had to close permanently.

Those who felt excessive pressure and tried to preserve liquidity by cutting their dividends might be pushed off the precious Aristocrats list.  Cutting the dividend doesn’t automatically exclude the aristocrat from the list. The company still has until the end of the year to reinstate its distribution and possibly add to their dividend to make the list. We think that is unlikely to happen with any of the below companies.

Here are some of the companies that face a tough situation:

Company Sector Situation
CAE Inc Industrials – 10.5k employees laid off

– Dividend and share repurchase suspended

– Salary Freezes

Gildan Activewear Inc Consumer Cyclical -Recorded a $100M loss in Q1

-Quarterly dividend suspended

-Seniors and Execs halved their salaries

Inter Pipeline Ltd Energy -Revenue down 8.4% at Q1 YoY

-72% dividend cut in Q1

-Directors cutting their salaries

Laurentian Bank Financial Services -Profit fell 79%, PCL soaring

-Dividend cut by 40%

-First dividend cut by a Canadian Bank since 1992

Methanex Corp Basic Materials -Demand declined 7%, historically low prices

-Dividend cut by 90%

New Flyer Industries Inc Consumer Cyclical -Idling plants, 300 lay offs

-Dividend cut in half

-Expansion plans shelved

Richelieu Hardware Ltd Consumer Cyclical -No dividend declared in Q1

-Significant ST debt, total debt up 105% from Q4 2019.

Sleep Country Canada Holdings Inc Consumer Cyclical -Net income down 36%

-Dividends and share repurchase suspended

-Expansion and capital spending halted

Suncor Energy Inc Energy -Low commodity prices, operating loss of $309M

-55% dividend cut

-Revised capital spending down twice in Q1

The impact of COVID-19 on Canadian dividend aristocrats

As you may have noticed, the predominant sector affected by the pandemic is Consumer Cyclical. These non-essential businesses face a huge reduction in demand for their products and services, and their profitability has been and will continue to be impacted substantially.

The other important sector of the TSX that was affected by this pandemic induced recession is the energy industry. Since most companies involved in this sector rely on the volatile price of oil and gas commodities, they usually are challenged to grow their dividend. For this reason, you won’t find many of them on the Canadian dividend aristocrats list.

Obviously, the repercussions of a pandemic induced recession are hard to quantify and even harder to predict given our lack of experience with this type of recession. Businesses now face an unknown threat which puts their operational flexibility to the test. More stocks may be bumped off the Aristocrats list by the end of 2020 as the financial impacts evolve over the coming months.

I know how hard it is to invest when stocks don’t seem to trade at their fair value

Don’t you hate not knowing when to buy or sell stocks? There are too many investing articles contradicting one another. This creates confusion and leaves you with the impression you may not reach financial independence. It doesn’t have to be this way. We have created a free, recession-proof portfolio workbook which will give you the actionable tools you need to invest with confidence and reach financial freedom.

This workbook is a guide to help you achieve three things:

Invest with conviction and address directly your buy/sell questions.

Build and manage your portfolio through difficult times.

Enjoy your retirement.

FREE WORKBOOK

Disclaimer: I hold shares of ATD.B, FTS, T, RY, OTEX, CNR.

Badger Daylighting; Good? Bad? I’m not Pulling the Trigger

The Company in a Nutshell

  • BAD counts on a network of over 100 locations operating over 1,000 hydrovac units.
  • As it invests continuously in its technology, BAD enjoys a first mover advantage.
  • The company is under lots of pressure by short seller Marc Cohodes.

It is not always easy to make the difference between a good and a bad company. This is exactly what is happening for the past couple of years with Badger Daylighting (BAD.TO). While the company says it’s growing and will be growing at a very fast pace, a famous short seller, Marc Cohodes (who shorted Home Capital Group (HCG.TO), is on a crusade against Badger. Is it THAT BAD? Let’s take a look.

BAD.TO, BAD, Badger DaylightingBusiness Model

Founded in1992, Badger Daylighting Ltd is a provider of non-destructive hydrovac excavation services through two methods: Badger Corporate locations and Operating Partners. The company’s technology, Badger Hydrovac System, is a truck-mounted hydrovac excavation unit. The company is part of the industrial sector, but doesn’t make our top industrial dividend stocks list.

BAD provides services to a diverse customer base including oil and gas, energy, industrial, construction, transportation and other markets, as well as numerous government agencies within Canada and the United States.

Growth Vectors

Source: Badger’s investor presentation

Badger has invested massively to develop its non-destructive excavation technology. It enjoys a massive fleet of 1,000 hydrovac units displayed across a network of over 100 locations. The company intends to use its first mover advantage to expand in U.S. territories. This strategy has worked well in the past few years as you can see in the image above.

Source: Ycharts

BAD also counts on the growing energy market. In fact, one of the reasons why BAD revenue grew that fast was mostly linked to excavation needs in the oil & gas business. Depending on where you stand, this sector could be a growing or volatile business.

Potential Risks

For one, Badger shows a cyclical business affected by seasonality. You clearly see the variation from one quarter to another. This makes it harder for BAD to manage its cash flow during the weaker quarter and always put additional hope that the “good quarters” must remain strong. The company is also over exposed to the oil & gas industry.

Unfortunately, the company is also under strong pressure by famous short seller Marc Cohodes (see affidavit). In his report, Marc highlights the absence of an explanation for lower earnings while revenue keeps growing. Management refused to explain margins contraction based on “sensible competitive information”. Most of the management team left between 2014 and 2016. Mark also questions BAD’s accounting methodologies, real number of trucks in operations and competitions coming from US companies. In other words; this doesn’t smell good.

Dividend Growth Perspective

BAD increased its dividend significantly since 2015, but keep in mind the company had to cut its payment after the 2008 financial crisis (dividend cut occurred in 2011). Are recent dividend increases been made to attract or distract investors?

While the payout ratio is very high, the company’s cash payout ratio is well in control.

Source: Ycharts

If BAD doesn’t show any accounting methodology issues and Cohodes’ concerns are not founded, we expect Badger to keep increasing its dividend going forward. Yet, this is a tricky investment for any dividend growth investors.

BAD.TO doesn’t meet our  7 dividend growth investing principles.

Valuation

Using the past 10 years PE history to have an idea of how BAD should be valued today tells us one thing: this stock is highly volatile.

Source: Ycharts

As you can see, it’s very hard to find an intrinsic value using the price-earnings standard. We also did a dividend discount model (DDM) calculations to find BAD’s value as a dividend growth stocks. Unfortunately, we came out empty-handed once again:

Input Descriptions for 15-Cell Matrix INPUTS
Enter Recent Annual Dividend Payment: $0.54
Enter Expected Dividend Growth Rate Years 1-10: 8.00%
Enter Expected Terminal Dividend Growth Rate: 5.00%
Enter Discount Rate: 10.00%
Discount Rate (Horizontal)
Margin of Safety 9.00% 10.00% 11.00%
20% Premium $21.67 $17.19 $14.21
10% Premium $19.87 $15.76 $13.03
Intrinsic Value $18.06 $14.33 $11.84
10% Discount $16.26 $12.89 $10.66
20% Discount $14.45 $11.46 $9.48

Please read the Dividend Discount Model limitations to fully understand my calculations.

At this point, Badger Daylighting doesn’t qualify as “Dividend Stocks Rock” material.

Final Thoughts

Badger has developed “exaction trucks” that are efficient and flexible. It enables to excavate in extreme winter condition. Since BAD manufactures its own hydrovac units, this gives the company a competitive edge against other competitors. However, BAD is still linked to the oil & gas industry is suffered greatly from over capacity between 2014 and 2016. Competition is heavy in the U.S. and it will put additional pressure on BAD’s margins. Finally, the fact the company is being pursued by a short seller increases BAD’s volatility on the market and raises additional questions. Would you invest in a company where you are not 100% sure management is completely honest? We keep a rating of 3 for both our PRO Rating and Dividend Safety score for those reasons.

If you made it this far, let’s be honest; you liked what you read. Now it’s time to make sure you don’t miss our next analysis and you subscribe to the Moose Newsletter by clicking on this link to make sure you don’t.

 

Disclaimer: We do not hold XYZ in our Dividend Stocks Rock portfolios.

 

TD Bank – The Canadian Bank Surfing on US Tailwinds

 

The Company in a Nutshell

  • Canadian bank revenues will increase as interest rate goes up.
  • TD’s very lean structure plays a great role in its expansion.
  • TD has a great presence in the US compared to other Canadian banks.

Business Model

TD is the second largest Canadian bank by market cap and is often playing side-by-side for the 1st position with Royal Bank (RY). TD is the most classic bank in Canada as its business model focuses a lot on retail banking. Its portfolio is well diversified between Canada (61%) and the U.S. (30%). As you can see, TD is mostly active on the US East Coast and shows no presence elsewhere.

TD markets

source: TD Q3 2018 presentation

Canadian banks are not known for their success past the Southern borders. TD is definitely the model other banks are following in that manner. TD has successfully completed several acquisition on U.S. soil and used in-branch expertise to develop their network. In other to remain competitive, TD is developing its mobile services. To this date, it now shows over 12 million clients using their mobile apps.

Growth Vectors

What we like most about TD bank is how management keeps things clean and simple. As the bulk of their business is generated through classic banking activities such as personal and commercial savings and loans, there are hardly no surprises coming from their financial statements. TD enjoys the best of both worlds. On one side, it is the largest Canadian bank in term of total assets and total deposits. It evolves in a highly regulated oligopoly protecting TD (and its peers) from outsiders. On the other side, it has understood how to grow successfully through the U.S. market. As their economy is flourishing, TD is well-established on the East Coast to Capture this tailwind.

Potential Risks

As Canadian interest rates start rising, American investors may be concerned about currency headwinds. But, in a long-term perspective, the currency effect (one way or another) doesn’t affect much an investment return.

The Canadian housing market has always been a concern since 2012, but TD seems to manage its loan book wisely. There hasn’t bee a correction in the housing market back in 2008-2010 as compared to what happened in the U.S. This is how we find very expensive housing markets among Canadian largest cities such as Toronto, Vancouver, Calgary and Edmonton. A higher insured mortgage level in the prairies seems adequate while TD continues to ride the ever-growing downtown Toronto housing market.

Dividend Growth Perspective

TD is a Canadian dividend aristocrat (which permits a “pause” in the dividend increase streak). Management prefers to increase dividend once a year and did so with a 12% increase earlier this year. You can expect the next raise in early 2019. Shareholders can expect a mid single-digit to double-digit dividend growth going forward.

Final Thoughts

A stronger economy from both countries led to TD’s stronger results. TD keeps things clean and simple as the bulk of its income comes from personal and commercial banking. It has a large exposition in major cities like Toronto, Vancouver, Edmonton and Calgary, combined with a strong presence in the US. If you are looking for an investment in a straight forward bank, TD is your pick. This banks is a good example of a perfect dividend triangle.

ScotiaBank – A Taste of Latin America


The Company in a Nutshell

  • BNS shows a 7% (CAGR) dividend growth rate over the past 10 years.
  • It is your ticket for an international bank with a solid core in Canada.
  • Recent quarters were fueled by stronger commercial loan demand from its international business.

BNS.TO

Business Model

ScotiaBank is the most international of the Canadian banks. It has built various geographic streams of income coming from Latin America and Asia (emerging markets). In fact, BNS is present in 55 countries. This is a strength other banks don’t have, especially when the Canadian economy is going through challenging periods.

Potential Risks

The bank run into several challenges such as the situation in Venezuela. It seems being present in emerging markets is not always a plus. Overall, diversification is a good strategy, but BNS international presence adds more volatility to its business model.

Dividend Growth Perspective

BNS management offered two dividend hikes in 2017. The first one brought its dividend from $0.74 to $0.76 and the next payment was of $0.79 per share. The two dividend payments come to a total of +6% increase. BNS also shows an annualized growth rate of 7% over the past 10 years.

Final Thoughts

BNS is the most innovative bank in the industry. It has done lots of business outside Canada, and always with an open mind. BNS deserves its international label with 40% of its assets outside Canadian borders. This hasn’t always been an advantage as BNS ran into its share of problems with Latin American economic struggles. However, things seem to get back on track as BNS year-end report shows EPS growth of 8% after adjustments. BNS still continues to find a solid ground in Canada with a +9% growth, but international banking (+15%) and global banking and markets (16%) are its real growth vectors. If BNS succeeds in its $2.9 billion acquisition in Chile, it will become the third largest bank of this country.

Royal Bank – King of Canadian Banks

The Company in a Nutshell

  • Royal bank raised its dividend twice a year, a nice tradition for shareholders.
  • Royal Bank has been ranked highest in overall customer satisfaction for the second year in a row.
  • RBC wealth management division will continue to be a growth vector going forward.

RY.TO chart

Business Model

Royal Bank is the largest bank of the group by market cap (it battles with TD) and provides various financial services to individuals as well as commercial and institutional clients. RY has a strong position in the personal and commercial banking sector (50% of its revenue). In 2015, RY bought City National, a Los Angeles-based bank focused on high net worth clients. The transaction opened US doors and another growth vector: wealth management.

Potential Risks

After the last market crash, the bank put its focus on growing its smaller sectors. While wealth management should continue to post stable income, the insurance and capital markets are more inclined to hectic returns. As the largest Canadian bank, Royal Bank could also get hurt by a bearish housing market

Dividend Growth Perspective

Royal Bank has a “tradition” of increasing its dividend twice a year. Therefore, you can count on two low-single digit dividend growth per year. It paused its dividend growth policy between 2008 and 2010, but came back with the double dividend growth tradition in 2012. Even with the crisis, RBC sustained a distribution growth of 8% CAGR for the past 5 years. For our DDM valuation, we have used a 6% dividend growth rate to keep a conservative approach.

Final Thoughts

Over the past 5 years, RY did well because of its smaller divisions acting as growth vectors. The insurance, wealth management and capital markets push RY revenue. Those sectors combined now represent about 50% of its revenue. Royal bank also made huge efforts into diversifying its activities outside Canada. Canadian banks are protected by federal regulations, but this limits their growth. Having a foot outside of the country helps RY to reduce risk and to improve growth potential.

Open Text – a Rare Growth Oriented Company with a Dividend Policy

 

Summary

#1 As businesses grow fast, they are looking for a way to manage their information.

#2 Big data management and security are at the center of many companies’ concerns.

#3 OTEX is a leader in Enterprise Information Management (EIM) systems.

Investing Thesis

Big data, cloud. and security. Those are three keywords you are not done hearing about. As we evolve through an era of consolidation; businesses grow larger every second. Managing growth is one thing, but dealing with the enormous amount of data this growth is bringing inside each company is part of Hercules labors. Enterprise Information Management (EIM) systems have been developed to manage this issue. OpenText (OTEX.TO) happens to be one of the leaders in this emerging business.  Let’s take a deeper look at how OTEX manages its way through the cloud.

Business Model Explained to a 12 Years Old

Imagine you have a business. A big one. Imagine that your business employs 100 people and keeps growing. Each day, you receive tons of information about your products, sales, employees, expenses, contracts, etc. This information is piling up faster than your revenue and you end up with mountains of useless and unreadable reports on your desk. You need a solution that will receive, integrate and digest this data for you. This is what we call Enterprise Information Management (EIM) system. EIM helps managers making better decisions by organizing the information in a way that you can access it rapidly, understand it and trust it.

OTEX is a leader in the EIM industry. It helps over 100,000 customers to share, store, retrieve and analyze their company’s information. Open Text is Canada’s largest enterprise software company.

Revenues

Source: Ycharts

As the need for EIM grows OTEX surfs the wave-like a pro. Management brilliantly combines partnerships and growth by acquisitions to ensure strong quarters one after the other.

Since its creation in 1991, the company has successfully performed 58 mergers & acquisitions. Open Text revenue is not only diversified across 100,000 clients, but also with 41% of their sales coming outside Americas. Through the usage of the cloud technology, OTEX is now able to multiply its products offering to the very same clients:

Earnings

Source: Ycharts

Don’t get fooled by the impressive EPS jump in 2017, this was all about a one-time tax benefit tied to the company’s internal reorganization. Following fast-growing company’s earnings isn’t really a good idea. EPS isn’t a good reflection of what the business is doing. Lots of money is being invested in R&D along with acquisitions. Focusing on its revenue growth perspectives makes more sense at this stage.

Dividend Perspectives

Growth-oriented companies in the techno industry are rarely focused on sharing their profits with their shareholders. OTEX has changed its mind back in 2013 when it pays its first dividend.

Source: Ycharts

As you can see in the graph below, the dividend seems to fluctuate over time. This is because OTEX trades on both the TSE and the U.S. Market (NYSE) under the same symbol. Its dividend payments are announced in USD:

Source: Ycharts

The company successfully increased its dividend by 76% through 5 consecutive dividend increases. There wasn’t a special dividend paid in 2014, the graph only shows a false distortion created by the stock split in February.

Source: ycharts

OTEX management aims at a 20% payout ratio based on cash from operation for the upcoming years. As the company continues its quest for growth, you can expect a double-digit dividend growth policy for several years to come.

OTEX meets my 7 dividend growth investing principles.

Potential Risks

Open Text evolves in a rapidly changing environment. It is continuously one iteration away from becoming obsolete as technology evolves very fast. There are also several competitors in this field lurking to grab OTEX clients. Many of them are larger U.S. companies with additional resources. While Open Text has built a strong name and there is a switching cost for any clients who wish to move to another EIM, it is not impossible that OTEX stop being the flavor of the month at one point.

The second risk I see is that OTEX is condemned to grow by more acquisitions in the future. With several transactions under its belt, it doesn’t seem like a problem. However, this could lead to hectic quarters.

Valuation

At this point of the analysis, I could say that I’m intrigued by OTEX, but I’m still not sure I would put my money on it. Let’s see what the market has to say about OTEX valuation:

Source: Ycharts

By looking at the past 10 years of PE history, it is still difficult to determine a trend. The company’s valuation clearly depends on their short-term growth perspective prior or following an acquisition.

In order to have a better idea of OTEX fair value, I used a double stage dividend discount model. I think management can continue with an aggressive dividend growth policy for the next decade. I also require a 10% return rate due to its sector volatility.

Input Descriptions for 15-Cell Matrix INPUTS
Enter Recent Annual Dividend Payment: $0.66
Enter Expected Dividend Growth Rate Years 1-10: 12.00%
Enter Expected Terminal Dividend Growth Rate: 7.00%
Enter Discount Rate: 10.00%
Discount Rate (Horizontal)
Margin of Safety 9.00% 10.00% 11.00%
20% Premium $64.81 $42.58 $31.50
10% Premium $59.41 $39.03 $28.87
Intrinsic Value $54.01 $35.49 $26.25
10% Discount $48.61 $31.94 $23.62
20% Discount $43.21 $28.39 $21.00

Please read the Dividend Discount Model limitations to fully understand my calculations.

Unfortunately, the bulk of OTEX value lies in its growth perspectives and not within its real numbers. In other words; OTEX is overvalued. The DDM is often difficult to use for smaller yielding stocks. At 1.50%, we can’t really consider OTEX as the strong dividend payer.

Final Thoughts

I think OTEX future will be bright and the company will continue to thrive in the EIM business. However, it doesn’t include all requirements to be part of my personal dividend growth portfolio. I may wait until the company slows down on growth by acquisitions and distribute a larger share of its profit as dividend.

If you made it this far, let’s be honest; you liked what you read. Now it’s time to make sure you don’t miss my next analysis and you subscribe to my newsletter by clicking on this link to make sure you don’t.

Disclaimer: I am not long OTEX in my Dividend Stocks Rock portfolios.

 

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